Question

File + A' Read 34. The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=£940, year 2=£970, year 3=£1000, and year 4=£1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out. no points what has the U.S.

Answer 1

Price Index is calculated as = [Basket of good in Current year / Basket of good in base year] * 100

Year 1 = Base Year

Year	Basket of good	Price Index (Year 1 = Base Year)	Inflation rate (Year 1 = Base Year)
1	940	100	-
2	970	103.2	3.2%
3	1000	106.4	3.1%
4	1070	113.8	7.0%

Year 4 = Base Year

Year	Basket of good	Price Index (Year 4 = Base Year)	Inflation rate (Year 4 = Base Year)
1	940	87.9	-
2	970	90.7	3.2%
3	1000	93.5	3.1%
4	1070	100.0	7.0%

In the above two tables, inflation rate is same.